DCIT, SHIMLA vs. M/S HP POWER CORPORATION LTD., SHIMLA

and organize the development of all aspects of hydroelectric

power on behalf of Himachal Pradesh State Government

(GOHP) and Himachal Pradesh State Electricity Board

(HPSEB) in the state of Himachal Pradesh. GOHP and HPSEB

have a 60:40 equity participation in the assessee company.

The assessee company is implementing number of power

projects in the state of Himachal Pradesh. None of the power

projects undertaken by the assessee company had

commenced production up to the Assessment year under

consideration. During the impugned assessment year the

assessee company had earned interest on term deposits,

made out of surplus funds, at Rs.28,11,05,883/-, which it

treated as its business income and after claiming expenses

against the same, returned loss. The Assessing Officer

after elaborate discussion and relying on judgment of the

Hon'ble Supreme Court in Tuticorin Alkali Chemicals &

fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC) Apex Court,

held the gross interest earned as assessable under the head

income from other sources. Further in the absence of

relevant details/bills /vouchers of expenses claimed by the

assessee, to ascertain the exact amount which related to the

earning of income or related to the functioning of the offices,

the A.O. held that 10% of the total expenditure at Rs.530.09

lac was to be allowed as "revenue expenses" and the balance

amount at Rs.4779.65 lac was to be capitalized. Hence, after

allowing a deduction of 10% of the expenses at Rs.530.09

lacs out of the gross interest received at Rs.2811.06 lacs,

the net interest income of Rs.22,80,96,883/- was assessed

in the hands of the assessee as income from other sources.

The Assessing Officer further brought to tax misc. income

earned by the assessee amounting to Rs.4,22,04,000/-

,which the assessee had set off against the expenditure

incurred during construction to WIP, rejecting the

contention of the assessee that it related to different units.

The details of the miscellaneous income as reproduced in the

order of the CIT(A) is under:

i. Income from Transit Camp Rs.1.34 lac ii. H.R. Collection Rs.31.90 lac iii. Income from contractors Rs.366.41 ac iv. Misc. receipts Rs.22.36 lac Total Rs.422.04 lac 3. The matter was carried in appeal before the

Ld.CIT(Appeals) who found that in assessment year 2010-11

the Tribunal had adjudicated identical issue of taxability of

interest earned on FDR’s in the case of the assessee. The

Ld.CIT(A) found that the ITAT had held that the interest

earned on investments made in FDR’s from funds borrowed

specifically for the project & parked in temporary investment

in FDRs since there was delay in the project ,should not be

subjected to tax, following the decision of the Coordinate

Bench of the Tribunal in the case of Beas Valley Power

Corporation Ltd. Vs. ACIT in ITA No.857/Chd/2012 ,while

interest of balance surplus funds should be subjected to tax.

Accordingly, relying upon the decision of the Tribunal, the

CIT(Appeals), on the basis of details relating to the interest

income earned from various funds submitted by the

assessee, noted that out of the total interest income earned

during the year, Rs.11,68,81,610/- was attributable to

interest earned on funds borrowed specifically for the

projects. The CIT(Appeals) accordingly directed the taxable

interest income to be reduced by this amount. The

CIT(Appeals) further directed that the finance cost incurred

by the assessee, to the extent allowed as revenue expense by

the Assessing Officer, i.e. 10% of the same amounting to

Rs.25.8999lacs, to be reduced from the interest income held

not liable to tax, after verification by the Assessing Officer

that it related to the borrowed funds. The CIT(Appeals)

further upheld the allowance of 10% of the expenses

claimed by the assessee as revenue ,treating the balance as

capital in nature, holding that the Assessing Officer had

been magnanimous in doing so in the absence of relevant

details filed by the assessee in this regard. The CIT(Appeals)

accordingly directed that the same be reduced from the

remaining interest income held taxable by him. As regards

the issue relating to miscellaneous income brought to tax by

the Assessing Officer, the Ld.CIT(Appeals) upheld the order

of the Assessing Officer.

subjecting to tax the interest earned by the assessee to the

extent of Rs.11,68,81,610/-, and in directing the Assessing

Officer to verify and thereafter allow finance expenses

incurred for earning the same to the extent of 10% of the

same incurred, the Revenue has come up in appeal before us

raising following grounds in its appeal in ITA

No.942/Chd/2017:

assessee on surplus funds out of borrowed funds amounting to Rs.11,68,81,610/- could not be treated as income of the assessee, ignoring the fact that the assessee had not made any such claim in the ITR. 2. On the facts and in the circumstances, the Ld. CIT(A) has erred in directing the A.O. to reduce the interest income earned on borrowed funds, which was not even disallowed by the A.O., without appreciating the fact that addition of Rs.22,80,96,883/-was made by disallowing 'capital nature' expenses claimed as 'revenue expenditure', which were also allowed to be capitalized.” 5. During the course of hearing before us the Ld. counsel

for assessee at the outset pointed out that the issue of

taxability of interest income earned by the assessee had also

been adjudicated by the ITAT in the case of the assessee for

subsequent assessment years, i.e. A.Y. 2012-13 and 2013-

14, following its decision in assessment year 2010-11, which

had been followed by the CIT(Appeals) in the impugned year.

Copy of the order passed by the I.T.A.T. in the case of the

assessee relating to assessment years 2012-13 and 2013-14

in ITA Nos.940 & 941/Chd/2017 and in ITA Nos.859 &

860/Chd/2017 dated 2.1.2018 was placed before us. The Ld.

counsel for assessee, therefore, stated that there was no

infirmity in the order of the CIT(Appeals) in treating the

interest income of 11.68 crores as not taxable in view of the

consistent decision of the I.T.A.T. in the preceding years ,i.e

A.Y. 2010-11 to A.Y 2013-14.

by the order of the I.T.A.T. in the preceding years.

the interest income of Rs.11.68 crores as not taxable

following the decision of the I.T.A.T. in the case of the

assessee for assessment year 2010-11, which has been

followed by the I.T.A.T. in assessment years 2012-13 and

2013-14 also ,and no distinguishing facts having been

brought to our notice by the Ld. DR, we see no reason to

interfere in the order of the Ld.CIT(Appeals). The income so

earned by the assessee on borrowed funds parked

temporarily in FDRs have, therefore, we hold rightly been

held by the CIT(Appeals) to be not taxable. The ground of

appeal No.1 raised by the Revenue is, therefore, dismissed.

pointed out, is against the direction of the CIT(Appeals) to

the Assessing Officer to reduce the interest income held

not taxable to the extent of Rs. 11.68 crores by the finance

charges incurred for earning the same to the extent held

allowable by the Assessing Officer, i.e. 10% of the finance

charges incurred.

CIT(Appeals). The Ld.CIT(Appeals) we find has directed

reducing the interest income held not taxable by it, with the

finance expenses incurred if any in relation to the same, to

the extent held allowable by the Assessing Officer, i.e. 10%.

The Ld.DR has not been able to point out any infirmity in

the said direction. We therefore see no reason to interfere in

the order of the Ld.CIT(A) in this regard. Ground of appeal

No.2 raised by the Revenue is therefore dismissed.

has agitated against the action of the Ld. CIT(Appeals) in

taxing the remaining income on investment in FDRs which

was made out of the own or interest free funds by the

assessee, in its ground No.1 which reads as under:

“1. That in the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals) is not justified in upholding the treating of the interest earned on FDR's as income from other sources and allowing deduction only to the tune of Rs.11,68.81.610/- in respect of interest paid on funds out of which the FDR's yielding interest had been purchased . Fact of the matter is that the interest on FDR's is not taxable at all under the head income from other sources.” 12. Ld.Counsel for the assessee fairly conceded that the

issue was squarely covered by the order of the ITAT in

assessment year 2010-11 which had been followed in

subsequently followed in assessment years 2012-13 & 2013-

14 also.

In view of the above and in view of our findings on this

issue in Revenues appeal, made above in para 7 of our order

undoubtedly, the issue is squarely covered against the

assessee by the order of the Tribunal in the case of the

assessee for assessment years 2010-11, 2011-12 and 2012-

raised by the assessee before us and the same is, therefore,

dismissed.

Ground No.2 raised by the assessee reads as under:

“2. That in the facts and circumstances of the case the Ld Commissioner of Income Tax ( Appeals) is not justified in upholding the allowing of expenditure only to the tune of

Rs 5,30,09,000 and upholding the disallowing the remaining expenditure.” 13. The plea of the assessee in the present ground is that

the CIT(Appeals) had erred in upholding the expenditure to

the tune of Rs.5,30,09,000/-. The Assessing Officer, we find,

had restricted the claim of expenditure of the assessee to the

said amount, being 10% of the total claimed, on account of

absence of relevant details/vouchers and bills of the same.

The CIT(Appeals) held the said allowance to be magnanimous

considering the fact that no details etc were furnished by the

assessee to substantiate the claim.

argued that the entire expenses claimed were allowable,

which is evident from the details submitted of the same

before the lower authorities which has not been considered

before restricting the claim to 10%.

CIT(Appeals) pointing out that the assessee had failed to

substantiate its claim of expenses with necessary evidences.

ground raised by the assessee. The assessee we find has

failed to substantiate its claim of expenses before the lower

authorities despite ample opportunity provided. Even before

us the Ld.Counsel for the assessee was unable to

substantiate its claim with evidences. We therefore agree

with the Ld.CIT(Appeals) that the Assessing Officer has been

magnanimous in allowing 10% of the expenses claimed

despite the fact that the assessee failed to substantiate the

same. In view of the same, we find no reason to interfere in

the order of the CIT(Appeals) upholding the allowance of

expenditure to the extent of Rs. 5,30,09,000/-

Ground of appeal No.2 raised by the assessee is

therefore dismissed.

the miscellaneous income earned by the assessee and reads

as under:

“3. That in the facts and circumstances of the case the Ld Commissioner of Income Tax ( Appeals) is not justified in treating the misc. receipts of Rs 4.22,04,000/- as the income of the appellant. Fact of the matter is that the said addition is absolutely illegal and not sustainable in the eyes of law.” 18. Before us, the Ld. counsel for assessee pointed out that

this issue also had been dealt with by the I.T.A.T. in the

case of the assessee for assessment years 2012-13 and

2013-14 wherein the I.T.A.T. had upheld the order of the

CIT(Appeals) holding that the miscellaneous income earned

being inextricably linked to the investment made in the

course of setting up of project would be required to be

reduced from the preoperative expenditure and not be

subjected to tax. Our attention was drawn to the relevant

finding of the I.T.A.T. at para 8 of its order as under:

“8. So far as the second issue relating to the taxation of Misc. income is concerned, the Ld. CIT(A) following the same ratio and while relying upon the decision of the Hon'ble Supreme Court in the case of 'CIT Vs. Bokaro Steel Ltd., 263 ITR 315 (SC) held that the receipts of any amount which are inextricably linked with the process of setting up of plant and machinery, will go to reduce

the cost of the assets. The Ld. CIT(A) observed that the Misc. income earned by the assessee were linked to the investment made in the course of setting up of the project and, hence, were required to be reduced from the pre- operative expenditure. We do not find any infirmity in the order of Ld. CIT(A) on this issue also.” 19. The Ld. DR fairly conceded that the issue has been

decided in favour of the assessee in the preceding

assessment year, as pointed out by the Ld. counsel for

assessee.

taxability of miscellaneous income earned by the assessee

has been decided in favour of the assessee in assessment

years 2012-13 and 2013-14 and no distinguishing facts

having been brought to our notice by the Ld. DR, the issue

we find, is squarely covered by the decision of the I.T.A.T. in

the preceding years, following which we direct that the

miscellaneous income is not liable to be subjected to tax in

the impugned year but is required to be reduced from the

preoperative expenses. The order of the Ld.CIT(Appeals) on

this issue is therefore, set aside. The ground of appeal No.3

raised by the assessee is, therefore, allowed.

The appeal of the assessee is partly allowed. 21. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed. Order pronounced in the Open Court.

Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 7th August, 2018 *Rati*

Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR

Assistant Registrar, ITAT, Chandigarh